MCX and Financial Technologies

(Rajesh) #122

One point confuses me. Commodity is traded on NYSE, NASDAQ etc . Still CME is 50B $ company. Is there something different in case of NSE ? It needs to dig more. Why I am not comfortable presently is that MCX was still establishing itself in F&O, date is announced before it is established, even all future participants are not allowed yet. I am so confused that I don’t want to exit without full understanding of happenings.

(Abhishek) #123

The chances of NSE taking share away simply by lowering trading fees is low. Even if NSE offers free trading, it will still be difficult for them to take away share. With 99% market share, the other commodity exhanges have too large an impact cost on trading of large volumes. The trading fee is negligible compared to the impact cost that a market participant pays for trading on an exchange with low volumes. It is for this reason that MCX charges a 7 time high trading fee as compared to its nearest competitor NCDEX and yet is able to maintain a 99% market share.

(1.5cr) #124

There is some valuation comfort on mcx. I believe fair value is around 1100-1200 bucks. But I would love to know how and why the NSE and BSE cannot rapidly gain market share from MCX in a little bit more detail. Clearly the market thinks that MCX will continue to be leaders, as the price has not take any sort of a hit post the announcement. As MCX drops prices to hold off competition this could affect earnings growth right? please do give us some more insights.

(manish) #125

if the regulations are same for all then I would assume that a private player managed by good mgmt will beat a govt / psu company in the long run.
We know what happened to BSNL and PSU banks who had established infra much before the entry of pvt players.
However in the short run , this may effect MCX.
Also, how much time it will take for NSE to integrate operations on the same platform.
Do we know of any example where a govt company has beaten a established private player in any field.
This is possible only when they have unfair advantage from regulators like selling of subsidised fuel eliminated private players as the PSU companies were supported by the taxpayers money.

(1.5cr) #126

I’m extremely worried as MCX could face some serious headwinds for the next 1-3 years. Its an awesome business for sure, but as of now I would be cautious. There basically no opportunities in todays market to be very honest. Junk is going up in value and I’m sure we will see some correction soon. Stick to quality and stay invested but at the same time cash is king as they say…

(Dhwanil Desai) #127

Few points to ponder over in response to Universal Exchange development

  • This development has been on anvil for some time and SEBI had made it clear that after due consultation, they will allow the universal exchange to take off. Hence, the news is just the formalization of earlier process and there is nothing new about it. I think all stakeholders/participants have prepared for this impending regulation for some time.
  • From the industry perspective, if we scan through regulatory developments happening after SEBI becoming the regulator for commodities market, directionally, SEBI has charted a well articulated trajectory in terms expanding the market. Be it allowing the new products (such as options) to be launched, or new commodities to be allowed to trade or allowing new participants to trade (such as AIF Cat 3), they have taken first steps for expanding the market and have clearly indicated that they will take more such steps once the architecture around the new developments is fine tuned. Hence, going forward in medium term, we can expect a much larger market than today for commodity derivative segment. My hunch is that before October 2018 (allowing all exchanges to enter commodity space), SEBI will allow entry of few more institutional participants in commodity derivatives market giving the market much required depth to allow for multiple players. One of the reason I feel it is very likely is because in exchange business, liquidity is supremely important and low liquidity means high impact cost and skewed price discovery. Thus, logically, it may make very little sense to further divide an already shallow market and make the whole segment fall into low liquidity trap.
  • Coming to competition- two things must be factored in. Commodity segment is peculiar as compared to all other segments in one aspect. There is underlying physical commodity which needs to be delivered for contracts which are not cash settled. Now, the percentage of physical delivery happening is very low at the moment, one will still need to establish infrastructure for physical storage of commodities (i.e. warehouses). Secondly, unlike, equity markets, the stakeholders on the exchanges also includes producers, end users of the commodity and anybody using commodity in its value chain of manufacturing the product. These segment of users are sticky in nature and are not as mobile as retail/institutional participants. Thus, to lure them away from existing liquid platform, new players will have to give significant economic incentives to them. Even after giving incentives, moving away from existing player to new player is a slow process and the shift may happen over months/years.
  • On the other hand, if we study the history of exchanges around the world, the base rate of success in new players taking away significant market share from incumbent, is very low. Thus, based on the base rate elsewhere, I will put odds against the new players. Having said that, we all know how NSE beat the BSE hands down and snatched away market share. Hence, even though odds are against NSE, it may still do the same with MCX that it did with BSE few years ago. We must keep that possibility in mind and monitor. However, we should also remember,that NSE beat the BSE , one of the important reason was that BSE continued to ignore the technological advances and was inflexibile to make necessary changes to counter the moves by NSE. On the other hand, for MCX, they are already aware about the impending competition and are all geared up to take them on.
  • Lastly, even though NSE can burn cash to take away market share, MCX too has enough reserves (war chest of 1000 crores+) and will surely match them and put up a fight on that front. Hence, only cash burn, may not be adequate as a strategy for new players to break the liquidity jinx.
  • Another factor that is completely missed out in the debate is that Universal exchange is a two way street. Like NSE/BSE may walk into MCX’s turf, MCX may also do so in the segment of their choice. They have already indicated that they are considering entry into new segment (mostly currency and/or interest rate derivatives). This also opens up an opportunity for MCX.

All in all, it will be very interesting times ahead to see how this story pans out and how various player act/react to the dynamics of competition. At the same time, based on the above factors, it is not reasonable to assume that MCX will be the sole loser and NSE will be the sole gainer in the new dynamics. Network effect is one of the strongest moat and is difficult to break, thus just on the possibility of moat getting broken (or more realistically moat being challenged), taking an investment decision may mean jumping off too soon.

Discl: Invested in MCX from much lower levels and have significant allocation in portfolio.Views expressed above reflects my current thought process which may change/evolve with more time/data. This may lead to me buying/selling the business without updating my views here. Thus, request all to do their own due diligence before taking an investment decision.

(TT) #128

Don’t discount BSE. BSE got walloped by NSE in the equity segment, but they hired Ashish Chauhan, who was the architect of the derivatives segment at NSE. Since then, BSE has become a market leader in currency derivatives despite the fact that BSE entered the segment only in 2013-14. Further, they are a significant player in interest rate derivatives and are inching towards the NSE majority share there too. BSE in the last 5-6 years has laid a major emphasis on technology and in the newer segments it is doing very well. The BSE Star MF platform accounts for more than half of all mutual fund inflows today, again, despite starting the platform a short while ago. Though I agree MCX is more than dominant in commodities, both NSE and BSE have a vast network with brokers that can be effectively utilized to gain market share. BSE also has a commodity repository jointly held by CDSL, BSE and MCX (52:24:24 proportion).

In my view, it would make sense for MCX and BSE to merge eventually, since NCDEX is already promoted by NSE. Like the telecom sector, there’s going to be a dearth of exchanges suddenly and then there may be consolidation. It does not really make sense for MCX to try and built up an equities or debt platform and try to gain market share. It is a liquidity game and MCX has no calling card for equities or debt. Currency derivatives is a fast growing segment but then again, there’s not much money there at the moment. A BSE-MCX combine would make fantastic sense.

(Dhwanil Desai) #129


Yes, valid point and plausible scenario. I agree that with Ashish Chauhan at the helm, BSE can be a serious contender too.

My only driving point is, at this moment, there are multiple scenarios that can play out and it is difficult to fathom which one will crystallize and what the outcome of that scenario will be. Hence, it may be premature to jump off the ship especially when we see it may not be cake walk for new entrants. Another possible scenario is, some international commodity exchange buying out the majority shareholding (CME or any other) in MCX …,now something like that happening may again change the game and dynamics. Hence, I would prefer to hold my nerves, see how it plays out and make decision based on emerging dynamics and data.

(TT) #130

Of course. I’ve been invested in BSE for more than a year before the IPO. Any investment in BSE will be an extremely long term game, far longer than what most people consider long term today - at least 5-10 years, in my opinion.

(1.5cr) #131

Is there any timeline on the listing of NSE?

(TT) #132

It’s stuck due to SEBI probe. Don’t think it’ll be happening any time soon.

(1.5cr) #133

Okay. Then Im sure MCX might continue to trade at premium valuations…

(Rajesh) #134

I agree, it would not be easy to take market share from MCX. What about new products like Diamond, many other agriculture and industrial commodities still to be launched. As these commodities will be new on bourses, how MCX structure will favour to gain market share. All commodities are different, no relation with each other. End users, producer are different.
If new share of company is launched, certainly it will go to BSE, NSE because investors are same.
BSE, NSE will give trading terminals to Diamond participants in advance to hegde.
How MCX being a dominant player in commodity will help with market share.
Note- Gold and diamond players might be same. Consider any commodity where hedgers are different from existing ones.

(soumenghosh83) #135

News of exit of big stakeholder. Seeking comments/advice from boarders.

(HG) #136

DD Sharma’s recent view about MCX

(Umang Joshi) #137

Good thing is they are looking at 1,400 which is quite a premium. Also BSE showing interest should be a positive?

(soumenghosh83) #138

Qtr. result is not encouraging. Also, if BSE buys at premium, does it bring any benefit to retail investors like me ?

(SSRN) #139

The MCX CEO looks worried. The tone of the interview is very defensive. It will be better for BSE not starting from scratch and get into commodities by taking stake in MCX. BSE is sitting on surplus cash not yielding much and pulling down its ROE. With Kotak looking to exit, a deal between Kotak and BSE for the 15% stake in MCX should be a win win for the industry and the companies.

(TT) #140

What is the benefit of 15% stake to BSE shareholders? It does not make MCX a subsidiary and the money flows out without any direct returns to the shareholders in the form of increased earnings.

(SSRN) #141

MCX has no promoter. 15% from Kotak if it can be negotiated at a particular price (premium to current price) there maybe others also who could join Kotak in the deal and MCX can become an associate/subsidiary company of BSE.

Benefit for BSE shareholders - If BSE decides to enter commodities through MCX rather than on its own then it will not have to offer dirt cheap prices initially which will strain its finances in order to reach critical volume. Remember BSE liquidity enhancement scheme for derivatives where they spent quite a bit until they finally withdrew after not making much inroads. A similar scheme for commodities can be a disaster for BSE shareholders.